Corporate Executive Board Management Discusses Q3 2012 Results - Earnings Call Transcript

Nov. 1.12 | About: CEB Inc. (CEB)

Corporate Executive Board (NYSE:CEB)

Q3 2012 Earnings Call

November 01, 2012 9:00 am ET

Executives

Thomas L. Monahan - Chairman and Chief Executive Officer

Richard S. Lindahl - Chief Financial Officer and Principal Accounting Officer

Analysts

Timothy McHugh - William Blair & Company L.L.C., Research Division

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

David Ridley-Lane - BofA Merrill Lynch, Research Division

Gary E. Bisbee - Barclays Capital, Research Division

Paul Ginocchio - Deutsche Bank AG, Research Division

Operator

Good morning, welcome to the Corporate Executive Board's Third Quarter 2012 Conference Call. Today's call is being recorded and will be available for replay beginning today and through November 12 by dialing (719) 457-0820. The replay passcode is 8546530. The replay will also be available beginning later today and through November 12 at the company's website and at www.earnings.com.

To the extent any non-GAAP financial measure is discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the company's website and following the Investors link to yesterday's news release -- or this morning's news release, excuse me.

You will also find a PDF of the supporting materials that the company will use in its prepared remarks this morning by going to the Investors page and following the link to the Third Quarter 2012 Earnings Conference Call. Please review the second page of these materials, which includes important information about forward-looking information included in the presentation.

This conference call may also contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding the Corporate Executive Board's expected quarterly and annual financial performance for fiscal 2012 or beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements.

Without limiting the foregoing, discussions of forecasts, estimates, targets, plans, beliefs, expectations and the like are intended to identify forward-looking statements. You're hereby cautioned that these statements may be affected by important factors, among others, set forth in the Corporate Executive Board's filings with the Securities and Exchange Commission and in its third quarter news release.

Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

At this time for opening remarks, I'd like to turn the conference over to the company's Chairman and Chief Executive Officer, Mr. Tom Monahan. Please go ahead, sir.

Thomas L. Monahan

Thanks, Scott. Good morning, and thanks for calling in and/or logging into the CEB Q3 2012 conference call. Before I begin my remarks, let me say a brief note of thanks to everyone who accommodated our moving the timing of this call. We appreciate the flexibility in light of the weather events this week. Let us also send best wishes to our colleagues on this call or not of this call who have been significantly affected by the weather events.

Let me layout a roadmap for how we'll spend our time together. First, I'll provide a quick summary of the financials. Then I'll walk through our core strategic priorities and our longer-term financial goals. I'll then hand off to Rich who will walk through the financials in a bit more detail.

It was a very busy quarter at CEB. I'm proud of how our teams continued to execute well in a very complex global environment, even as we announced and closed a significant transaction. We emerged from the quarter with great momentum in our largest markets, an even stronger competitive platform and real clarity about where we need to target our energies and closed -- to close the year strong and set up a great 2013.

Revenue for the quarter was $164.7 million, up 35.5% from this quarter last year. Adjusted EBITDA margin for the quarter was 29.1%, up from 23.5% last year at this time. Non-GAAP EPS is $0.78 on the quarter, up from $0.47 last year at this time.

For the full year-to-date, revenue was up 21.6% and non-GAAP EPS is $1.85 through 3 quarters, an increase of 50%. At the highest level, the legacy CEB products are tracking to deliver growth and profit a little ahead of our expectations and our SHL products are tracking below their historical averages due to some transition issues and a few difficult markets. Let me add some color to the financial data. Please turn to Page 3.

The quarter continued to be a tale of 3 regions, 2 with considerable strength and one with some shorter term growth challenges. North America, both across the CEB businesses and our new SHL business, continued to see very healthy rates of organic growth. The APAC area broadly was a source of overall strength.

Even though economic conditions are less than stellar across these regions, our teams generally did a great job linking our resources to the most important drivers of business value in our member P&Ls and earned the right to grow.

Growing in Europe continued to be very difficult. Given SHL's broader exposure to Europe, this affected the overall growth of this business more significantly, which you saw in the 8-K, and continued into the quarter. Obviously we were aware of this exposure and incorporated it into our valuation of the business. At this point, a couple of their markets are tracking below our original projections for '12 but we have a lot of confidence that our go-forward plans for the business will yield solid growth across 2013.

Overall, SHL's growth for the year will fall below their historical trend. While market mix will play a role, I think it's also say safe to say that SHL's growth was affected by distraction factors from the acquisition. Their senior-most management team spent much of Q2 working on the sale and much of Q3 working on the integration in preparing for a few senior management shifts.

Given the solid wallet retention numbers that we're seeing in the business and huge opportunity in front of us, we believe that our ramp back to normal growth ranges is largely within our control but will take several quarters to move through the transition cycle. Overall, we couldn't be more excited about the potential of this combination or with the pace at which our teams are working to make this real for customers.

Conversely, given our overwhelming North American footprint, overall CEB organic growth was quite strong. The sum of these puts and takes not only places us on track for solid growth and profit in 2012 but anchors our 2013 planning on our now larger portfolio, driving it toward the historical 8% to 13% organic growth rate against the backdrop of industry-leading margins. We'll obviously give you a more concrete picture early in 2013.

The quarter's results underscored the storyline of the year so far. Considerable strength in number of our major markets globally, a major strategic step forward with the acquisition of SHL and a few pockets of weakness, most notably in EMEA. The net result is one of strong organic growth, solid margin performance and an unrivaled platform for customer value and growth in the years ahead. There's much work ahead, particularly in realizing the opportunity in the SHL acquisition. But we have a world-class team making progress every day.

You can turn to page 5. Our overarching mission is to unlock the potential of organizations and leaders by advancing the science and practice of management. We believe that doing this will create unparalleled business value for our members and pave the way for strong growth in the years ahead. We've taken many steps over the last few years to move us closer toward achieving that goal, but it is an ever-moving target. Over the next several years, our work is organized against 3 core priorities which you see listed on Page 5.

These 3 priorities will shape how we manage the conclusion of 2012, as well as inform our early planning for setting up a successful 2013. Let me spend a few minutes highlighting key components from each of these priorities.

Three priorities are leading the analytic transformation of talent management, consistently creating distinct business value for members and achieving brand recognition that matches our global impact.

Please turn to Page 6 and I'll spend a little more time on each one. Leading the analytic transition -- sorry, transformation of talent management. While many companies have long claimed that talent is their greatest competitive asset, we've seen a real change underway across the past couple of years. Leading organizations globally have begun in earnest to manage talent with the same rigor and analytic depth with which they've managed other vital corporate assets. We've been a key part of this transformation, arming them with insights and best practices in our core HR practice and beyond. They've seen us drive this agenda through our work on topics as varied as employee productivity, sales performance and changing IT skills. And with the acquisition of SHL, we are in an unmatched position to take the lead in meeting the growing demand for deeper, more predictive and actionable support for leaders in HR, and importantly, across the executive suite.

Our foremost focus on this front right now is the effective integration of our SHL assets. To that end, let me share an update on our early progress to date.

We started the first phase of our integration planning efforts even before the combination closed in August. The goal of this space is to enable us to operate as an integrated corporate entity with a clear path to achieving our cost synergy targets. Leadership and integration teams from both organizations have spent the past 8 weeks creating key touch points and integrating some core processes. Most recently, we've integrated the SHL finance and HR teams with CEB's teams to provide important cross-form resource allocation and talent management capabilities. We've also put in place a roadmap to the $5 million cost synergy target that we outlined in our initial announcement. As expected, the overwhelming majority of these come from scale purchasing opportunities, benefits consolidation, fee avoidance and already-announced staff transitions. We're hard at work putting in plans to capture them and we will have realized the full benefit across the next several quarters.

We've also put in place a great leadership team to operate the business on the CEB platform and to take advantage of key synergy opportunities. CEO David Lee will be stepping down from his role, but will stay on for a period of time as an adviser to me. David has done a great job positioning these assets for solid growth and, importantly, cultivating a great leadership team. I've asked Robert Morgan, SHL's Chief Customer Officer, to lead the business and join the CEB senior leadership team. Robert has been a key member of the SHL team for the last several years and has a stellar reputation and an outstanding record of leadership in the industry, including heading up the Saratoga Institute and business units Experian and Hudson [ph]. Robert has worked with us in several collaborative efforts in his past lives and we've long admired his strong leadership skills. We're excited to work with him to bring a now unparalleled set of CEB and SHL research-based management capabilities to bear on the outcomes of global companies.

We're now in the second phase of integration when we will focus on the much larger opportunities that we see from realizing the revenue synergies. I'm pleased to report that our teams are making faster advances in some of these areas than we had originally anticipated. Let me share a couple of highlights.

There are 3 main areas of effort: first, marrying CEB's deep functional knowledge with SHL's predictive capabilities to create products that link to business value drivers and senior decision makers. Second, leveraging the large CEB North American footprint and strong new sales capabilities to drive SHL's growth here. And finally, levering -- leveraging SHL's strength in key global markets to grow the CEB global footprint.

Given challenges in some key international markets, we've prioritized the first 2 for now and have made solid early progress. Our most important early win was the first joint product launch, which we just announced at HR Tech in Chicago. It's called the CEB Challenger Selection & Assessment offering. It helps companies select high-performing sales people and key sales managers to drive better productivity and performance. As you might guess, the product links our data on sales performance with SHL's Predictive People Analytics to create a powerful new tool for sale sets. I'll share a bit more detail on how this launch fits into our broader suite of sales effectiveness solutions in just a few minutes.

We've also put up in place some cross-selling pilots, where lead CEB account managers partner with their SHL colleagues to generate opportunities at the largest U.S. companies. We're still in a very early part of a limited pilot, but have already boosted pipeline value by about $600,000.

Clearly, the full realization of these efforts will take time and will shape how we plan and resource for the immediate future. But our strong early progress on the integration will not significantly inflect our near short-term outcomes, but does establish a very solid foundation for accelerated, scalable growth in 2013 and beyond.

Please turn to Page 7 for our next priority. The second strategic priority is consistently creating distinct business value for members. Since the start of our company, we have focused on innovative research and analytic methods and ways of blending insight, service and technology to transform our customers' performance. Our goal has always been to target and improve really important customer outcomes. This obviously starts with great usage. We actively track users and usage to make sure that we are connecting our products to the right users and work streams.

But while usage is important, we hold ourselves to a higher standard. We also seek to measure our ability to enable growth, increase efficiency and reduce risk. The strength we are seeing in the business is evidence that our members recognize the business value that we add, and we have recently redoubled our efforts to make sure that everything we do, every product, sales, service, interaction, leads directly to great outcomes for our members. This begins with clear focus on economic levers that matter and flows through every product and service interaction thereafter.

I'm particularly proud of the recent work we've done to help our members grow in a very difficult economy. A real focus of ours has been the expansion of our support for member efforts to drive sales, which is briefly summarized on this page.

We started with proprietary research and data, conducted originally in our subscription products, which really resonated with the sales leadership community. You can see some of the findings to the left of this page. First and most importantly, our customer data indicates the sales process accounts for more than 53% of product value in B2B markets. And even more importantly, a certain type of salesperson is 4.5x more likely to be a high performer than their peers. You can imagine that, for Head of Sales, this is powerful insight that you'd be really eager to act on. To help them do that, we developed and launched several service offerings that embed these Challenger insights into practical tools to help sales leaders enhance their effectiveness. Across the year, we put in place a full suite of analysis, management and development resources to help companies accelerate growth and realize pricing power. These have proven incredibly resonant with the marketplace. Companies seem really hungry for resources that help them profitably gain share in a slow growth environment. Among the products we now offer to Head's of Sales are our core Sales Executive Council and Sales Leadership Council products. Together, they're among the most widely-used sources of insight and benchmarks about sales effectiveness in the world.

Direct sales, rep training and tool sets through our Challenger rep front [ph].

Moving down the right-hand side of Page 7. The CEB Manager Development Program, which trains managers and arms them to drive team performance. Sales Management Leadership Academy, which gives sales managers tools and skills to take on broader leadership roles. Finally, messaging toolkits that guide members through the creation of distinctive collateral and conversion of that collateral into sales messages.

And finally, as I mentioned, our most recent service launch in the sales effectiveness terrain is the CEB Challenger Selection & Assessment offering. This is the first product we've launched using SHL's predictive technology. It arms our customers with the ability to speed time-to-productivity for sales reps and achieve a higher goal attainment through better management of their sales teams.

While I'm pleased with the great financial outcomes that our teams are creating, I'm even more excited by the direct impact we are having on customer outcomes. Let me give you just one example of the feedback that we're hearing from customers, quote: "Groundbreaking, timely and disciplined research presented in a way that is both intuitive and completely actionable. It has already impacted our organization by creating customer lends that impacted our sales recruiting, hiring, training and development. Since implementing Challenger in partnership with CEB, the receptivity and sales results have been terrific." That was Jeff Connor, SVP and Chief Growth Officer, Aramark Global Food Hospitality and Facility Services, talking about our sales effectiveness work. And this is one of dozens of great documented member value stories we've generate recently across the business. We believe that a laser-like focus on delivered business value in every sales, service and product interaction will continue to power our own growth and success.

Let me take us through our third strategic priority, achieving brand recognition that matches our global impact. Despite our deep relationships with the overwhelming majority of the largest companies in the world, we believe that we're an under recognized resource. Without a sustained reputation for impacted value, any attempt we'd make to trumpet our brand will probably backfire. But given our teams' demonstrated track record of creating great outcomes, we see high return building awareness of the CEB brand among key buyers globally. Ultimately, higher-brand awareness facilitates the work of our sales, service and advisory teams, driving growth, increasing productivity and enhancing margins. And frankly, it helps our members too, as it speeds their adoption of products and services that improve their business outcomes. Our incredibly strong research gives us a great platform for engaging key audiences. We are targeting our efforts here on 4 key levers: First, continued exposure on top-tier media outlets. Here we had another strong quarter with CEB insights on topics ranging from sales performance to eurozone contingency planning, highlighted in outlets ranging from The New York Times to The Australian to CNN.

Second, partnering to reach new audiences and potential users. The goal here is to leverage large installed customer bases to introduce our resources to new buyers, and importantly, to link directly to more workflows. A couple of recent examples include a marketing alliance with the Young President's Organization, which has a common commitment to advancing executive leadership. This partnership now enables us to share CEB resources, insights and tools with YPO's 20,000 members worldwide and greatly increases brand awareness among senior executives in our fast-growing middle market segment.

Another good example is the series of events we've just conducted with the Royal Society for Arts and Manufacture in London, engaging senior executives and thought leaders on key topics in ethics and innovation. SHL, too, has a long history of partnering effectively to link our products directly to workflows and to leverage other companies' presence to grow our key product areas. I'd expect us to see us keep this momentum going.

Our third area of focus is hosting large-scale events that showcase the breadth of our offers. These complements our intimate senior most-only meetings with large summits for senior leaders and HR, IT and sales and marketing. These have proven to be very cost-effective ways of engaging leaders and introducing them to a range of products and services they don't yet buy. In particular, we have just come off a very successful SHL link event in London that brought together HR execs from the U.K. and beyond, to hear about innovations in talent management from their peers and lead SHL and CEB researchers.

We just also wrapped up a sales and marketing summit in Las Vegas that attracted 600 CMOs, CSOs and their teams. Both of these events saw considerable leap in year-on-year attendance and in concrete cross-sell opportunities.

The fourth area of focus and, by far, the most important is ensuring that our teams speak globally with one voice about CEB and its capabilities to our global customer base. We believe that our innovative business models provide uniquely authoritative, relevant and actionable resources to the markets we serve. And even in our scale, even our best customers, leverage only a fraction of what they could. Arming our people with consistent clear messages about how we helped companies drive performance has been a real focus across the past 6 months. You've seen visible public examples through our public rebranding and the change of our NYSE ticker symbol, but the real work has been at the ground level, making sure that each of our people globally can make the full power of our business real for each of our customers.

This work will continue apace as we work to rapidly link the SHL brand into CEB's brand framework as an accelerant to the significant revenue synergies we see ahead.

Before I hand the call over to Rich, let me close with a word about our teams globally. We've got a lot done this quarter, announcing and closing a significant transaction while delivering double-digit revenue growth and margin expansion against a complicated macro backdrop. I'm proud of what we accomplished, but even more so, I'm energized by the opportunities ahead. And I'm confident that my 3,500 colleagues around the world are uniquely qualified and uniquely positioned to drive great outcomes for our customers.

Let me turn the call back to Rich for a discussion of our financial results.

Richard S. Lindahl

Thanks, Tom, and good morning, everyone. I'll use my remarks this morning to accomplish 2 important goals: First, we want to help investors unpack our consolidated results to get a clearer picture of our current financial performance and operating trends. To that end, as you've seen in our press release, we've modified our non-GAAP measures to better represent our ongoing cash earnings profile. Second, we want to update you on our expectations for the combined CEB-SHL business over the near term -- near to medium term, having completed the post-closing activities we discussed on our second quarter call. We'll tackle this objective by discussing both our updated 2012 outlook and our preliminary views for 2013.

Let's start by turning to Slide 9 to review our key operating metrics for the quarter. CEB contract value at September 30 was $522.4 million and was up 10.6% compared to the prior year. This increase was fueled by double-digit, firm-wide bookings growth as continued strong performance by our North America and Asia Pacific teams offset a slight drop in year-over-year bookings in the EMEA region.

For SHL, full quarter revenue growth was essentially flat on a year-over-year basis as the slower trends experienced in the second quarter continued into the third quarter, reflecting both some challenged markets in Europe and the to-be-expected distraction of the sale and integration process.

CEB Wallet retention was 99% at September 30, 2012, and remains in the normal range of the high 90s to low 100s. SHL Wallet retention rate was 101% in the third quarter of 2012, reflecting the high degree of recurring revenues in that part of our business. Growth in total CEB member institutions extended the gains made in the first half of this year by increasing 8% compared to last year. Once again, this growth was driven mostly by additions in middle market, but also due to an increase in the number of large corporate customers. And finally, CEB Contract Value per member institution continued to improve as it grew 2.4% to $87,900.

Please turn to Slide 10. As you can see, our adjusted third quarter financials benefited from both solid organic gains in our CEB segment and the addition of SHL to our results from the August 2, 2012, acquisition date.

CEB segment revenues were $139.1 million in the third quarter, a 14.4% increase compared to $121.6 million in the third quarter of 2011. Included in the CEB segment is approximately $4.3 million of inorganic revenue in the quarter from Baumgartner and Valtera.

SHL segment revenues contributed $25.6 million in the third quarter and were net of an $8.4 million impact of the deferred revenue fair value adjustment. This quarterly revenue adjustment represents the first portion of the total $34 million adjustment to pre-acquisition deferred revenues that resulted from the purchase accounting fair value analysis. Additional quarterly reductions will continue to be recognized going forward and through 2013.

Moving on to operating expenses. Cost of services in the third quarter increased by $19.1 million versus the third quarter of 2011. SHL represents about 70% of this increase. Other acquired businesses accounted for most of the remaining change, with the additional balance coming from headcount and related expenses in the product functions.

Member relations and marketing expense increased by $10.8 million in the third quarter versus the prior year period. SHL was also the biggest factor here, representing about 65% of the change. Increased sales and marketing staff, higher commissions due to the growth of bookings over the past year and the addition of Valtera and Baumgartner also contributed to the increase.

G&A costs in the third quarter were up $4 million compared to the prior year with about 95% of the increase due to SHL. Acquisition-related costs were $18.6 million in the third quarter, which breaks out into $10.7 million of deal-related fees and expenses, a $5.1 million non-cash loss on the foreign currency hedge put in place at the announcement of the acquisition and $2.8 million of integration costs. We continue to expect that we will incur total integration costs related to SHL that will accumulate to $10 million to $15 million through the end of 2013.

Interest income and other was $1.6 million in the third quarter compared to a $2.4 million loss in the third quarter 2011, primarily due to swings from loss to gain in both the fair value of deferred compensation plan assets and foreign currency translation. Interest expense in the third quarter was $5 million versus $0.2 million in the prior year period, reflecting $4.8 million of additional interest on the $555 million of new debt raised to fund the SHL acquisition.

Total company adjusted EBITDA margin in the third quarter was 29.1% versus 23.5% in the third quarter of 2011. At the segment level, adjusted EBITDA margin was 29.3% for CEB and 28.4% for SHL in the quarter. In addition to improved scaling of the business on strong revenue growth, the CEB segment margins benefited from a $1 million swing from a loss to gain on foreign currency translation, the normalization of revenue recognition accounting as compared to the prior year and as we discussed in Q2, the continued deferral of some investments as we focused on the early stages of integration.

Depreciation and amortization in the third quarter was $11.3 million, an increase of $7.5 million compared to the third quarter of 2011. Most of this change is from higher amortization of intangible assets, resulting from the SHL, Baumgartner and Valtera acquisitions. We currently estimate that our full-year effective tax rate will be approximately 47% before the effect of foreign currency translation gains or losses. The rate this year is higher than the statutory rates due to the non-deductibility of certain items for tax, primarily transaction costs related to the SHL acquisition. The tax provision in the third quarter thus reflects additional amounts needed to bring the 9-month total up to the full-year estimated rate. Next year, on a normalized basis, that is before factors that could give rise to permanent book tax differences, we currently expect that our effective tax rate will be in the range of 38% to 40%.

I'll come back to non-GAAP EPS in just a minute. But first I'll highlight a few other items in the quarterly financials. Accounts receivable was $150.2 million at September 30, which includes $40.2 million for SHL. The current portion of deferred revenues was $289.5 million at September 30, including $26 million from SHL. As compared to the prior year, deferred revenues increased by 12.1% on the CEB portion due to improved year-over-year bookings and points to additional near-term revenue growth. Year-to-date cash flows from operations were $77.3 million for the 9 months of 2012, an increase of 33.1% over the prior-year period driven largely by improved business performance, the addition of SHL and cash tax benefits from the sale of Toolbox.com.

Please turn to slide 11. In his opening remarks, Tom told you that non-GAAP diluted earnings per share for the quarter was $0.78, representing a 66% increase from the third quarter of 2011. This growth is the result of 3 factors. Improved performance in the legacy CEB business, the addition of SHL's results and the application of a new methodology for calculating this measure. In the top half of the slide, we first stepped through a year-over-year comparison of non-GAAP EPS using our prior methodology. On that basis, which provides a clearer view of ongoing operations, you can see that our non-GAAP EPS was $0.60, a 42.9% increase, reflecting both growth in the CEB segment and the acquisition of SHL.

In the bottom half of the slide, you can see that we are now also adjusting out the impacts of share-based compensation and the amortization of acquisition-related intangibles. We believe adding back these non-cash expenses will help investors more clearly assess CEB's ongoing cash earnings and facilitate easier financial comparisons to other information services companies, many of which define these non-GAAP measures in a similar fashion. You'll note that for the same reason we have also changed the definition of adjusted EBITDA, to add back share-based compensation expense.

Please refer to Pages 11 and 12 of our press release for a full reconciliation of these non-GAAP measures. Now let's move on to our outlook.

The following comments are intended to fall under the Safe Harbor provisions outlined at the beginning of the call and are based on preliminary assumptions which are subject to change over time.

Please turn to slide 12 which highlights our current outlook and provides a preliminary view into next year. Starting with 2012, you'll note that we raised our guidance for the year to reflect both CEB performance and the addition of SHL. We now expect consolidated revenues to be in a range of $610 million to $620 million for the year, which contemplates CEB revenues trending towards the upper half of our prior outlook, our near-term expectation for flatter year-over-year growth at SHL and the estimated impact of deferred revenue fair value adjustments in the fourth quarter.

We now expect adjusted EBITDA margin for this year to be in a range of 26% to 27%, which implies a sequential reduction from the year-to-date level. This expectation is based on seasonal factors at CEB, several items intended to set up a fast start to 2013, including our initiative to bring forward certain hiring needs into the fourth quarter of this year, and our plans to accelerate marketing and brand development initiatives in this year.

We also expect a small sequential decline in SHL margins, largely driven by expected project delivery costs in the quarter and a catch up of some hiring activity.

Depreciation and amortization in 2012 is expected to be in the range of $37 million to $37.5 million and capital expenditures are expected to be approximately $18 million to $20 million. The effective tax rate for this year is currently estimated to be 47% due to the factors I discussed a few minutes ago, and these elements combine to imply that our non-GAAP diluted earnings per share is expected to be in a range of $2.45 to $2.55 in 2012.

Now let me share some preliminary thoughts about next year. Of course, we will have a much clearer view on projected 2013 financial performance when we provide our initial guidance during our February call. Our perspective will be informed by where we end 2012 and the nature of the prevailing economic environment, as well as our operating and investment plans for 2013. But here's how we see the world today:

First and foremost, while there are certainly challenges in pockets of the legacy CEB business, especially in Europe, on balance our teams are enjoying solid momentum that we expect will carry through into 2013. And we will continue to make the investments necessary to sustain that performance and also develop new revenue streams.

Next, as Tom said earlier, we see great potential on our SHL business and continue to believe that these operations will produce similar economics in terms of revenue growth and profitability to those seen on the CEB platform. As we disclosed in the 8-Ka we filed on October 18 and again in today's call, 2012 growth at SHL is lower than what the company experienced in the 2009 to 2011 period. For 2013, we are constructing an operating plan designed to put SHL back on a trajectory towards its historical growth rates by increasing sales capacity and pursuing revenue synergy initiatives, especially in North America.

While we expect it may take a few quarters to see better growth at SHL, our teams are focused on achieving that outcome as soon as possible. As a result, we expect 2013 consolidated revenues, net of the impact of deferred revenue fair value adjustments, to grow in line with our long-term 8% to 13% organic growth objective as compared to pro forma 2012 revenues.

We would expect to see adjusted EBITDA margin in the range of 25% to 27% depending on the pace and timing of revenue growth versus our investment plans. Depreciation and amortization will depend on our capital investment plan for 2013, but at this stage, we would expect roughly 5% growth on a pro forma basis. This assumption incorporates potential capital expenditures, including an integration related cost of $25 million to $30 million. And as I said earlier, we expect the normalized effective tax rate in 2013 to be in the range of 38% to 40% depending on the magnitude and mix of U.S. versus international growth. We will provide a more comprehensive discussion of these 2013 expectations and the implications for non-GAAP EPS during our February call to review full-year 2012 results.

That's it for the financial summary. We will now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go first to Tim McHugh with William Blair & Company.

Timothy McHugh - William Blair & Company L.L.C., Research Division

First, I want to ask about SHL. Can you just give us a little more color on kind of some of the transition issues that you talked about? And I think you noted a couple of markets, so can you be a little more specific about what was weak there?

Thomas L. Monahan

Sure. Yes, SHL definitely saw its growth take a step back in Q3 and Q4, and we're not expecting a rapid tick back up in -- I'm sorry, in Q2 and Q3, and we're not expecting a big tick back up in Q4. We see 2 big reasons behind this. One is they've gone through a pretty significant corporate transition for a company of their size. Their management team was deeply involved in selling the business and then getting off to a fast start in integration. We look at it and say, there's no question that, that cost them time and energy that would have otherwise been spent on the market. And second, very healthy growth in their core U.K. and U.S. markets was offset, to some degree, by sluggish performance in the challenged EU markets that I think we can all name if we tried. And just -- in their business, European markets are just a bigger portion of the business line than they are in any of our other business lines. So the impact from those markets is necessarily going to be greater. That said, we remain incredibly excited about this asset. As we move through this transition we expect to see the SHL portion of our business growing at a very healthy rate. We think their historical performance supports this view and we also see opportunity to drive improved pipeline development and conversion by deploying some of the best practices that we've developed over time at CEB. As we mentioned in the script, we're already seeing good referral volume, and that's off a very limited pilot. So we're feeling short-term challenges in some markets that you could predict, but we see huge opportunities, particularly in North America, from this combination.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Have you -- some of the transition issues, is it just a diversion of focus? Or have you seen turnover or any other more significant issues following the merger?

Thomas L. Monahan

As I said on the call, there was some planned and well signaled management turnover. So we're through that exercise right now, and Robert Morgan is taking ownership of the business. We've known Robert for a long time, and we're very excited. He's got his leadership team galvanized and very focused on the market now.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. And then as we move forward, to get the kind of 2013 back up to the kind of your normalized growth rate, can you give us a little more color on kind of -- you talked about increasing sales capacity. Is that primarily in the U.S.? And then the revenue synergy part, can you help us understand -- so for example, the one -- the joint program you already rolled out for Challenger sales. How big can any individual program like that be in a year? Just so we can get a sense of how those factors can offset any macro challenges.

Thomas L. Monahan

Sure. I mean, at a very simplistic level there, new product launches launched with the SHL capability inside will be broadly comparable to historical CEB product launches. I mean, they're in that strike zone. So think about it as the first year contributes but it's as they scale over time that things get really interesting. So we're excited by the Challenger launch. I think to say its impact on 2012 would be minor at best. We'll see good, early momentum. We'll get some key nameplate customers in place. It will start to ramp in 2013 and will continue to ramp beyond that. I think you'll see that pattern be pretty consistent, the way in which these products come to market looks very much like our historical product launch activity set. We see really, 3 key areas of revenues synergy. First is that one, marrying our strong business value, insight into functional performance with their strong predictive capabilities to give people the tools to manage talent in their organization. And I would expect a few more of them in 2013. That's obviously a key priority area. I'm thrilled with how fast the teams worked to get that one in the marketplace. That -- as you know, that exceeded my expectations. That was not -- the team set themselves an aggressive timeline to get valid, predictive capabilities in market, and they delivered wonderfully. And that gives me great confidence we'll be able to get more products in market like that quickly. Second, just leveraging the big CEB North American footprint to drive SHL's growth here. Some of that is referral, some of it is using the fact that we can -- just -- we've already begun incorporating some of their data as a marketing play to our customers. They know what's available to them. Some of that is adding sales capacity and some sales process that we've got, that we think allows them to knock on more doors and create more opportunities. And third, down the road, they have a great presence in the international markets that make up -- as strong as North America is right now for us, the rest of the world, we have a number of markets where we're still underdeveloped, and we will leverage their capacity in those markets to grow our business. That's probably our third priority in terms of urgency right now, given that some of those markets are challenged. But make no mistake, we see huge opportunity across time there. So we're feeling good about integrating the functions and getting a plan in place to capture the cost savings, feeling good about linkages on products, early days yet on the referrals and scaling the sales engine, but a lot of indicators that we cannot -- together, we can accomplish some important things, so very exciting. And I feel very confident that we're going to have a great 2013 plan ready to go.

Richard S. Lindahl

And the -- Tim, this is Rich. I'd just add a little bit more color, just in terms of how this plays out in 2013. As we mentioned, it will take probably a couple of quarters to get back on a trajectory towards those historical growth rates. So you would expect that we'd see better growth at kind of this time, third, fourth quarter next year. But the full-year growth rate probably won't be well up into those historical rates.

Timothy McHugh - William Blair & Company L.L.C., Research Division

The full-year growth rate won't be?

Richard S. Lindahl

For SHL.

Timothy McHugh - William Blair & Company L.L.C., Research Division

For SHL. But your guidance here, it's for the overall to still be within?

Richard S. Lindahl

Correct.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. And last, just a numbers questions for me, Rich. The organic CEB growth. Can you tell us what the contribution was from Baumgartner in terms of -- and Valtera in terms of the CEB growth? I can't remember if that's...

Richard S. Lindahl

Yes, yes. It was -- the Baumgartner Valtera piece was $4.3 million.

Timothy McHugh - William Blair & Company L.L.C., Research Division

Okay. Same as the revenue?

Richard S. Lindahl

I'm sorry.

Timothy McHugh - William Blair & Company L.L.C., Research Division

I was asking contract value.

Richard S. Lindahl

It was comparable to last quarter. It was in that $4 million range.

Thomas L. Monahan

And at this point, Tim, we've got those products effectively well integrated into our platform. So we've mixed them up with some CEB capabilities and are jointly bringing them to market. So I think that -- if you're a customer, you don't even look at most of those and see them as different anymore.

Operator

And we'll go next to Shlomo Rosenbaum with Stifel, Nicolaus.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Could you just give us the normalized year-over-year growth for SHL, however you want to do it, either on a pro forma revenue or a reported revenue? Just -- you only had like 2 months' worth. And what did I see on a year-over-year basis?

Richard S. Lindahl

So on a constant currency basis, in the third quarter, it was roughly 1% year-over-year growth. There were currency headwinds, again, in the quarter. So when we put out the Q next week, which will provide the third quarter pro forma numbers, that will actually be slightly negative.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And it sounds like the -- what we're seeing is a consistent deceleration of the revenue growth, and you're expecting that to continue into the fourth quarter and possibly into the first quarter of next year as well?

Richard S. Lindahl

I think based on we're seeing right now, we think that the year-over-year growth is similar in the fourth quarter to what we have in the third quarter, based on the current forecast in place. And then we would expect to start to make some progress back on the upswing as we move into next year.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. So in order to get into your -- into the range you're talking about in the 8% to 13%, were you either thinking a really strong snapback in SHL or really good performance on CEB. Is that correct?

Richard S. Lindahl

Well, I think, obviously, depending on which end of the range you're talking about. That's a key factor. I think we certainly expect, as I said, that by the time we get to the end of the year, we should see growth rates trending more towards historical patterns for SHL. I think, for the -- on the full-year basis, that probably gets us close to the lower end of the range there. But CEB we would still expect to be anywhere in that kind of low to high end of the range. So on a blended basis, it gets us into the full-year range.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then when you're talking about a pro forma growth of 8% -- or 8% to 13% for next year, what's the actual revenue number we should be using to grow off of? Just -- what's the number you're expecting in a GAAP basis-driven report? You could give it with the range, with the $610 million to $620 million annualized number.

Richard S. Lindahl

Yes. I mean, I think, obviously, that will depend on the fourth quarter. But if you take the -- if you assume the same rate of growth in the fourth quarter as the third quarter, on a pro forma basis, that gets you kind of over $210 million at SHL, depending on where currency exchange rates go. And then if you just use something kind of above the midpoint of our range that we had at CEB, that's kind of in the 5 -- between $545 million, $550 million area. So you add those numbers up, you get something in the kind of $760 million area.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. So what we should be looking at is the growth off of a $760 million number?

Richard S. Lindahl

Yes. But then you need to apply the deferred revenue haircut for next year.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And so what -- how should we think of that? There were $34 million, is this going to be ratable $8.4 million a quarter? How should I think of a deferred revenue haircut?

Richard S. Lindahl

So I would expect it'll be at -- it's inherently hard to predict because there's a portion of it is based on actual usage. But our best estimate right now is for a similar number in the full fourth quarter as to what we saw in the third quarter. That probably slows down a little bit in the first and second quarter of next year, and then tails off in the second half. But I would say most of it should be -- have -- should've come through by the end of 2013.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

So I'm looking at $760 million minus $26 million, and then when next year's growth of 8% to 13% off of that number, the $760 million minus $26 million? Are there -- just looking for a real number out there. What's the real number to look?

Richard S. Lindahl

Yes. I mean, obviously, Shlomo, again, we're going to provide more clear guidance once we get to the end of the year and we provide our full-year guidance. This is just a way for you to shape your modeling at this stage in time.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Should I take out the $26 million for this year or -- for that 8% to 13% growth or not? From the $760 million, how should I think of that?

Richard S. Lindahl

You need to take it out of this year's. So you need to take the $16 million out of this year and then grow off of that.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then Wallet retention is actually pretty surprising on SHL, given the revenue trajectory. What's going on over there exactly? Are they having stronger growth out of existing clients in North America and shrinkage in Europe? I mean, can you give us more color on that?

Thomas L. Monahan

Yes. Shlomo, it's Tom. It's kind of interesting, their business is not widely different than ours. In challenged markets what you tend to see happen, and this is true in our European business as well, the easiest thing to do, and it's not easy, but the easier of the 3 things to do is renew your existing customers. The next hardest thing to do is cross-sell to them, and the hardest thing to do is go knock on a new door and get someone to adopt a new solution. So on balance, this illustrates just how sticky their products are, in that they're -- even with their market exposure, their existing customer usage and engagement seems to be pretty good. As I said on the call, I do see an opportunity for them and for us to work together to continue to add some new sales capacity to build on top of that. But it does, I think, illustrate the strength of customer relationships and the good job that their teams do at engaging existing customers and staying part of those workflows. But it's interesting. Their business does behave a little bit like ours in challenged markets, in that the hardest thing to do is kick open a new door.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then just on a metrics basis. When I look at the number added to net income to get to the adjusted EPS versus the write-off of deferred revenue. The write-off of deferred revenues is $8.4 million. But the add-back is only $6.1 million. Is the difference an assumed tax rate?

Richard S. Lindahl

Yes. That's applying the appropriate effective tax rate.

Shlomo H. Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division

And so the effective tax rate would be lower on that stuff?

Richard S. Lindahl

It's lower on that because it relates to international jurisdictions.

Operator

We'll go next to Dan Leben with Robert W. Baird.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

Just a clarification question first. On the revenue guidance for 2012, is that the pro forma adjusted revenue or is that GAAP revenue?

Richard S. Lindahl

That's GAAP revenue.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then digging into SHL. Is there any seasonality in that business on the non-subscription side of the business that would impact the fourth quarter positively or negatively?

Richard S. Lindahl

On balance, they're less seasonal than we are. There are a couple of periods, the summer months, kind of July, August, in particular, and then December as well, where you see a little bit slower usage consumption, just given kind of office holidays and things like that. So that will certainly be -- that December element will be a factor in the fourth quarter, but that's contemplated in our forecast.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then the 8-K, the SHL business is broken out by 5 regions. I know you mentioned that the U.K., Tom, was a stronger region. Did the performance there actually get better in the third quarter? Because that was an area that was sluggish in the filing.

Thomas L. Monahan

Yes. There's some noise in that filing number, Dan, in that they flow some of their distributor relationships through that U.K. number. So think of, like 3 guys who are doing coaching work in Milwaukee, would license some of their stuff to do the coaching work to assess talent. That business, for historical reasons, just flowed through the U.K. And that part of the business was -- it's been -- it bounces around a little bit, probably in decline across time as they build out their own capabilities. So that number flows through the U.K. and mucks it up a little bit. U.K. growth has been solid this year across the board, and that continued in the quarter.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then just on the core CEB segment. Very strong margin pull-through in the quarter. Revenues up $3.5 million, but an $8 million increase in EBITDA. Help us understand the moving parts there. Is it $2.5 million stock comp, $1 million FX and then the rest just deferral of investments? Or were there other moving pieces on the cost side?

Richard S. Lindahl

The other piece is the revenue recognition impact from last year. You may recall, we had about -- we had a $2.5 million reduction in revenue last year in the quarter, which depressed the margin in the quarter.

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

But on -- I was just looking on a sequential basis.

Richard S. Lindahl

So I'm sorry, which were the items that you highlighted again?

Daniel R. Leben - Robert W. Baird & Co. Incorporated, Research Division

So on a sequential basis, it's stock comps an additional $2.5 million -- your expenses were $4.5 million lower. So it's $2.5 million stock comp, was there an, I guess, FX impact? Or what else brought the expenses down sequentially?

Richard S. Lindahl

Well there are seasonal factors. The biggest one is that the payroll tax impact for bonuses being paid out in the second quarter, and then we also have -- 2Q and 4Q were kind of our peak times for doing the member meetings, and the summer time is a slower time. So those 2 were the biggest factors that kind of drove sequential expenses down.

Operator

We'll go next to David Ridley-Lane with Bank of America Merrill Lynch.

David Ridley-Lane - BofA Merrill Lynch, Research Division

Maybe a bigger quick picture question. On the broader market for employee -- preemployment testing, what percentage of the market is now on a SaaS-based model, like SHL, versus more traditional methods? I'm just trying to get your sense of how far along in that secular shift this market really is.

Thomas L. Monahan

Yes. I think we're still in the early innings on a couple dimensions here. One is if you look at preemployment, I think it's adopted for some functions but not for all. So we still see huge opportunities, both by job category and by geographic market, to continue to roll out SaaS-based or technology-based preemployment. Secondly, post employment, like the stuff we're doing for Challenger, is hugely under-penetrated from a technology and data perspective. There is still underutilization of these capabilities internally, as people think about evaluating people for promotions or new jobs or reorgs, et cetera. So I think on both sides, we're at the very early stages of adoption, many job categories it hasn't been applied to yet and many geographies have not proceeded down the adoption curve yet. Probably the third thing is I'd say -- creating kind of a complex simultaneous equation here. But third thing is I'd say companies have only begun to leverage the data this generates to make better talent decisions, too. So the breadth of application beyond simple predictive -- of hire, no hire, promote, not promote, but more broadly, what do we have as strengths and weaknesses. And we think the first Challenger product we've got is early days there, but there are other things we can do to help people do talent audits, talent analytics, et cetera. So very early days in terms of adoption as we work through this. And that's our historical strength, is introducing people to new ways of conducting key elements of their business. So part of the reason we're so excited is, helping people make this conversion is something CEB has historically been pretty good at.

David Ridley-Lane - BofA Merrill Lynch, Research Division

That's great. And then maybe how many quarters would bookings have to be down in EMEA before -- I'm sure you're already tightening all the costs that you can, but before you start making larger cost-containment actions?

Thomas L. Monahan

I think we're still -- to my previous answer, the profile of the revenue in EMEA is solid but not perfect renewables, okay, with a lot of room to improve cross-sells and more difficult new sells. What we think about that is, on balance, it probably shapes where the next 5 salespeople get deployed when we do hiring, rather than any sort of cost outs. So given our under-penetration in those markets, over the long term, we still have significant hiring to do. But if people aren't buying new things, we'd probably throttle back some of the sales force build there and deploy elsewhere in the world where we see robust growth and uncovered territory. So right now, we're seeing a little bit more capacity add in North America or in the Americas more broadly and Asia Pac. But that's how we'll manage through this. I think the core business there is performing solid, but we have fewer opportunities to grow it.

David Ridley-Lane - BofA Merrill Lynch, Research Division

That's helpful. And then maybe if I could squeeze in one more. On the CEB segment, the fourth quarter has historically been the largest one for adding new memberships. Are you tracking to double-digit contract value growth in that core CEB segment?

Thomas L. Monahan

It's hard because it's a leading indicator on a leading indicator. It's almost as if you're meeting my simultaneous equations with a second derivative. The -- I would say we -- as we said coming out of the third quarter, we see our teams doing a great job connecting what we do to renew levers of business value, both for members and for prospects. And that's -- I think our core performance says that the economy is not great now but companies need help to perform, and our teams are doing a great job helping them envision how we can help them and then making it happen for them.

Operator

We'll go next to Gary Bisbee with Barclays.

Gary E. Bisbee - Barclays Capital, Research Division

I'll ask the question that's on everybody's mind but nobody's asked to date. You tell us in July that SHL is growing above the corporate. In August, maybe you tone that down a little bit to sort of more like at the same range. And then you drop these numbers on us a few weeks ago that show it decelerated a lot. I think we all totally understand that Europe's weaker. But just why didn't you say that? It's either that you communicated it terribly or you just didn't know. Either one is pretty disturbing to me. So -- and with a 20% drop in stock, obviously, I'm not the only one who was surprised by that. So anything else you can tell us other than what you've said to date to explain that?

Thomas L. Monahan

Gary, as we were going through the diligence process in Q2 and Q3, we certainly saw exposure to markets that were challenged. But at that point, certainly, in Q2, their business was holding up, well enough in other markets that we felt comfortable, obviously, that, that exposure was going to be manageable. The -- we did adjust our valuation based on our view of the business and the exposure to certain markets it had. So we've reflected in our conversations with the sellers. That said, I would say a few markets did surprise us to the downside. And given their relatively larger exposure to that market, that has affected the overall growth rate of the SHL product areas. As you'd guess, that really does affect our near-term synergy and integration plans. To the good, it's only reinforced what we saw as the most important element of synergy, which is helping their business get bigger faster in North America. It's a market where we have a lot of momentum, a lot of size and a lot of relationship. So there's -- if anything, the exposures we saw were confirmed and probably to the downside in a couple of circumstances. But more broadly, the big simple idea behind the acquisition, that this is something companies need more help with, this is a new way of solving real problems and this particular business has a leading solution that's under-applied in North America, is not something that we've changed one bit of our opinion about. But there were -- to be fair, there are a couple markets that were, even within the exposure bands, downside surprises to us. So we're working to offset those and get them back to their historical growth rate. But I'm highly confident, both in the quality asset and our ability to reaccelerate growth.

Gary E. Bisbee - Barclays Capital, Research Division

Okay. The comment there about focus more in North America. How quickly will you -- I guess, what does the sales cycle look like to cross-sell? How quickly will you be able to see success or get perceptions from clients as to whether this will make sense more broadly? Is this something a quarter from now, you have a better handle on? Or is this going to take a while?

Thomas L. Monahan

As to perceptions from clients, assume we tested that very thoroughly even prior to engaging in this process. So a big thumb up -- thumbs up from our customers that both this is a large and growing need and that this combination makes a lot of sense in our customers' minds. And the feedback we've gotten from customers has been great. As to conversion of that excitement into revenue, as I said, we're already generating referrals. But we want to be a little careful. Both sets of sales teams had pipelines they were working entering Q4. So my desire to go sprinkle new exciting bits of pixie dust all over what they were working on was pretty low. I wanted to make sure we stayed very focused on the near-term opportunities these guys had already been developing. So we put in place a few limited pilots to see what made sense. I think the impact in Q4 will be modest. But we're starting the process of building the sales capability, adding the resource. And sales cycles, probably a little longer than CEB's historically. So as you add sales capacity and start sales cycles, part of the reason Rich says they're going to be tracking back across the year is not all of that will take hold in Q1 and Q2. We'll get -- we'll take advantage of the earliest and most obvious opportunities as soon as we possibly can. But the full build is going to take several quarters to work through the human capital plan into the sales pipeline into closed business and into the P&L.

Gary E. Bisbee - Barclays Capital, Research Division

Okay, great. And then just one more thing that came out of that filing that was -- that, I guess, was interesting to me was you had sort of core SHL business, although I don't even if core is the right word because it had, had some acquisitions. But then there was this deconsolidated subsidiary serving U.S. government or, at least, in large part. I guess, 2 questions on that. Are you confident that this low-double digit to low teens or whatever the number was, was actually the organic growth of the business when you look at customers and units sold and not more related to the historical M&A there? And then #2, on this formerly deconsolidated subsidiary. Is the risk to that business -- because it looked like in the first half it generated the lion's share of the growth that SHL had. Is the risk to that is the U.S. government starts cutting back, whether it's on defense as Obama says he's going to do, or just in general, trying to deal with the deficit we have here? Is that asset is going to be challenged?

Thomas L. Monahan

Let me answer the first question which is, no, we're highly confident that the growth rates we're talking about were at the customer and at the market and opportunity level, not -- they were -- we went through that very carefully in the process, to make sure that we are comfortable with historical growth rates. And also other things like we're comfortable with the quality of the asset and the quality of the resources. So I did a lot of customer-level diligence. One of the great things about CEB's huge customer footprint is we can diligence an asset very thoroughly. Let me talk a little bit about PDRI. It -- just so you get the full context, they're the unit within SHL North America that does post-hire assessments and development, which is a huge area of interest to us. They're the big thought leaders in that space. A portion of that business has been for the defense and security-related agencies. So SHL, as a U.K. company, had to manage them through a proxy board. Hence you saw them broken out in the financials as an equity method investment rather than fully consolidated. It's a great business. It's got great thought leaders. Their growth reflects the general relevance of what they do rather than a single contract opportunity or market. They did -- they do serve the defense industry, but they're well beyond that as well. We do watch the federal budget situation carefully. Obviously, we live here. Probably a couple of things worth keeping in mind as we look out, though. One is less than 10 -- far less than 10% of our overall business, including PDRI, is in the government sector. That's a much smaller share than you would see in almost any other business services or advisory firm. So we're still -- we still, ironically, see it as a growth market. Second, the things we do, the areas of strength we've historically enjoyed, and messages appear to be actually particularly relevant right now. We're not selling $15 million, $250 million programs. We're selling management tools to tighten management of day-to-day activities and manage people better which, historically, governments been a big buyer of big things, and small things that help them manage better have not been highly resonant for a whole bunch of reasons. Ironically, in addition to the PDRI growth, our own government business was one of the fastest-growing markets in the third quarter as people are trying to find tools to help them manage their -- for themselves more effectively. We saw people reaching out to us across a variety of agencies, et cetera. And the things we do for them, procurements, cost management, cybersecurity, employment for key populations like veterans, are areas of pretty intensive focus. So we think we're pretty well positioned for an era of government austerity. That said, it's not -- given that it's such a small part of our business in total, it's not going to be area of corporate-level breakout growth. But we actually are hearing -- even as people have prepared for and begun to implement austerity measures, they seem to be turning to us a little more rather than less often. We have our eye on it.

Gary E. Bisbee - Barclays Capital, Research Division

And then just one last one. The preliminary 2013, thanks for that. The margin flat to slightly down, can you just give a sense, Rich, maybe some of the moving parts there? I know you had previously cited $5 million of cost savings, and I think that, that adjusted earnings excludes merger integration. So what else is going on, you're expecting to invest in sales force for this business? Or are the -- you said the margins would tick down a little sequentially. Is that going to continue for several quarters? How do we think about the -- that margin guidance?

Richard S. Lindahl

Sure. I mean I think the thinking right now is that, yes, we are going to be making investments in a number of areas, sales capacity being the biggest one. And as Tom referenced, focusing on North America, in particular, for SHL is a factor there. We'll also be doing product development, again, as Tom had mentioned, and with a focus on fully leveraging not only the SHL assets, but other efforts that were in place on the legacy side. And one of the swing factors always is kind of how fast does revenue grow. And so that would certainly be a key element of what determines whether we end up at the higher or lower end of that margin range as well.

Operator

And we'll take our final question from Paul Ginocchio with Deutsche Bank.

Paul Ginocchio - Deutsche Bank AG, Research Division

Just on the legacy business for CEB. Just wondered if you could give us some color around bookings and deferred revenue for the third quarter, excluding any impact from SHL.

Richard S. Lindahl

Yes. The deferred revenue was up about 12% in the quarter. I highlighted that on the -- in the deck and also on the balance sheet. So the bookings, if you do the math that people typically do, you'll find kind of low double-digit growth in bookings as well.

Operator

At this time, I'd like to turn the conference back to Mr. Monahan for any additional or closing remarks.

Thomas L. Monahan

Perfect. Thanks very much. Let me thank everyone for calling and/or dialing in and especially appreciate the efforts some folks made, given weather impacts.

I will close where I began. I'm proud of how our teams continue to execute very well in a tough environment, even as we closed and announced a significant transaction. We leave the quarter with real momentum at our largest markets, an even stronger competitive platform and a tremendous amount of clarity about where we'll target our energies and focus. To both close the year strong as we outlined, but also to set up an attractive 2013.

I look forward -- Rich and I'll be out on the road, and we're always here and eager to keep people up-to-date on our progress in the months and years ahead.

Operator

That does conclude today's presentation. We thank you for your participation.

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